He said the change represented a "significant shift" in the sector which, while improving competition, would also increase the risk of bank failure.

Under the new rules, new banks will be allowed to run with 4.5pc capital-to-risk ratio, while established ones will be required to operate at ratios of around 10pc.

"This is a significant difference and reflects a philosophy saying we will accept in future that the actual failure of a bank, provided it happens in a smooth fashion, is not necessarily a regulatory failure," said Lord Turner, speaking to the Parliamentary Banking Standards Commission on Wednesday.

He continued: "If you want to remove barriers to entry you’ve got to have entry and exit.

"We are introducing a significant change to relative capital regime of new entrant banks compared with existing banks. People have failed to realise so far what a significant shift that is."

Current regulation demands that new banks hold even more capital as a proportion of their risk than established banks due to add-ons levied on new entrants.

The banking sector came under fire from the Office of Fair Trading in January when the watchdog released a report showing the current account market was less competitive than it had been in 2008, with the four largest banks enjoying 75pc of the market between them.